Are Jewett-Cameron Trading Company Ltd.’s (NASDAQ:JCTC.F) Fundamentals Good Enough to Warrant Buying Given The Stock’s Recent Weakness?

With its stock down 4.0% over the past three months, it is easy to disregard Jewett-Cameron Trading (NASDAQ:JCTC.F). However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Jewett-Cameron Trading’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Jewett-Cameron Trading is:

17% = US$3.4m ÷ US$20m (Based on the trailing twelve months to February 2021).

The ‘return’ is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.17 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

A Side By Side comparison of Jewett-Cameron Trading’s Earnings Growth And 17% ROE

To start with, Jewett-Cameron Trading’s ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 17%. Jewett-Cameron Trading’s decent returns aren’t reflected in Jewett-Cameron Trading’smediocre five year net income growth average of 3.2%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

We then compared Jewett-Cameron Trading’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 4.8% in the same period, which is a bit concerning.

past-earnings-growthNasdaqCM:JCTC.F Past Earnings Growth June 21st 2021

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Jewett-Cameron Trading’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jewett-Cameron Trading Making Efficient Use Of Its Profits?

Conclusion

Overall, we feel that Jewett-Cameron Trading certainly does have some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn’t the case here. This suggests that there might be some external threat to the business, that’s hampering its growth. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Jewett-Cameron Trading.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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